Key Market/Economic Observations

Large-cap equities fell below their 200-day moving average for the second consecutive month as investors reacted to a confluence of headline risks and lower earnings revisions for the fourth quarter. Interest rates moved higher in November, with the 10-year Treasury achieving its highest yield since 2011. As the yield curve resumes its flattening shape, uncertainty over the path of monetary policy remains a point of contention between Fed policy makers and investors. Despite third-quarter earnings growth of nearly 26%, the highest level since 2010, dollar strength, rising input costs, and missed sales estimates from some mega-cap momentum stocks overshadowed strong bottom-line results. The much-anticipated G-20 meeting begins on the last day of November as President Donald Trump and Chinese President Xi Jinping are expected to continue trade talks before the January 1 deadline when existing tariffs increase to 25%.

International Developed MarketsDeveloped International Markets Face Uptick in Volatility and Festering Macroeconomic Concerns along with Monetary Policy Normalization

Developed international equity markets continue to move in parallel with the recent pickup in downside volatility across U.S. markets. A host of macroeconomic issues such as weak third-quarter economic growth, the Italian budget conflict, and the United Kingdom’s Brexit struggles likely contributed. Though volatile, the MSCI EAFE, German DAX, and Japanese Nikkei 225 indexes were nearly unchanged across the month and remain at two-year lows.

Despite the challenges to developed markets, emerging market equities posted a much-needed positive month in November (as of November 27). One month does not constitute a trend and we are likely to see further volatility within the asset class; but, recent performance could signal the early stages of shifting investor sentiment. Additionally, relative valuations are beginning to look attractive for patient, long-term investors. Over the near term, however, we believe the bear versus bull case for EM equities rests primarily on investor expectations for Chinese economic growth and the strength of the dollar relative to EM currencies.

While the broader Bloomberg Commodity Index has yet to reach correction territory, 14 of the 18 commodities measured in the index have surpassed the threshold over the past six months. Less pressure from commodities is likely a welcome development for companies affected by tariffs as it may help to ease the burden of increased interest costs, particularly if tariff rates escalate next year. The past month was defined by swings in energy commodities, which fell 7% in aggregate. Crude oil entered a bear market, decreasing over 20% in November alone as the supply outlook improved. However, natural gas futures rose over 30% as tight inventories were met with seasonally high demand after colder-than-expected weather across much of the United States. The net effect is likely to be a positive for real consumer spending, which has been seasonally strong so far in the fourth quarter.

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